Re Webb, M.A. v Ex parte Taylor, A.R.

[1987] FCA 346

C A T C H W O R D S

BANKRUPTCY - creditor indemnifies trustee for costs of litigation

- property recovered by letter threatenlng litigation -

whether power to make order favouring indemnifying credltor.

Bankruptcy Act, 1966 s.109(10)

Re: Marion Alice Webb

Ex parte: Alan Richard Taylor & Ors.

Qld BN 758 of 1984

PINCUS J.

BRISBANE

7 JULY 1987

r. y _P-

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FEDERAL COURT OF - 9 ?UL 1387

.-\ AUSTRALIA

\ , . PRINCIPAL REGISTRY

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IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	) QLD BN 758 of 1984
BANKRUPTCY DISTRICT OF THE SOUTHERN	)
DISTRICT OF THE STATE OF QUEENSLAND	)

RE: MARION ALICE WEBB

EX PARTE: ALAN RICHARD TAYLOR

Applicant

MERCANTILE CREDITS LIMITED

First Respondent

AUSTRALIAN GUARANTEE CORPORATION

LIMITD

Second Respondent

PINCUS J. 7 JULY 1987

REASONS FOR JUDGMENT

This is an application by the trustee of the estate of

the bankrupt, Mrs. Webb, for orders under s.109(10) of the

Bankruptcy Act 1966, which is set out below. The provision

empowers the Court in certain circumstances to make an order

giving an advantage to a credltor who has glven the trustee an

indemnity for costs resulting in the recovery of property. Here,

the indemnifying creditor's case is that property was recovered

under an indemnity and that it should have ll the money, or most

of the money, which has been so obtained. There is only one other

creditor and the contest is between the two.

2.

I Section 109(10), so far as relevant, reads as follows:

"Where in any bankruptcy -

(a) property has been recovered, realized or

preserved under an indemnity for costs of

litigation given by	a creditor or credltors;
...

...

the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of

that property ... with a view to giving the

indemnifying creditor or creditors, as the case may

be, an advantage over others in consideration of the risk assumed by creditor or creditors."

The facts are, in brlef, that a creditor, Mercantile !

Credlts Limited, gave an indemnity to the trustee, prompting him to pursue an investlgation of property transactions in whlch the bankrupt and her husband had engaged. In consequence in the facts

ascertained, it was decided to begin proceedlngs and the papers

were settled by counsel, but a threatening letter induced the

bankrupt's husband to surrender hls interest In the property in

question. The opposing creditor is Australian Guarantee

Corporation Limited which did not even become aware of the

bankruptcy until after all the events just mentioned had occurred.

In more detail, what happened was that on 4 May 1983,

Mrs. Webb transferred real property at Moorooka to her husband as

a gift . In April 1984 Mr. Webb mortgaged that property for

$45,000, and using the proceeds, bought land at Greenbank for

$40,000. On 26 November 1984, on the petition of Mercantile

Credits Limited, Mrs. Webb was made bankrupt and on 13 January

1985 the trustee had conversations with the Queensland credit

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manager of the petitioning creditor in which the possibility of

investigating the matter further was discussed. On 28 March 1985

the trustee instructed solicitors to search the Moorooka property

and the transfer to Mr. Webb was found. On 13 June 1985, a

representative of the trustee met a representative of Mercantile

Credits Limlted, and it was agreed that the solicitors would be instructed to look into the matter further, to act for the trustee

in a public exammation of the bankrupt, and thereafter to apply

to attack the transfer of the Moorooka property to Mr. Webb - all

at the expense of Mercantile Credits Limited. That was later

confirmed In writing by a document executed on 27 August 1985,

which does not quite accord with the facts because It refers to "a

further application to the Court for a declaration In relation to

the real property currently owned by Mrs. Webb." Counsel for

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I	Australian Guarantee Corporatlon Limited pointed out that there
was never really any questlon of an application in relatlon to

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"real property currently owned by Mrs. Webb". Any interest of

hers had passed to the trustee. However, I do not think thls

error in the draftmq of the document creates any doubt as to the

true scope of the indemnity, which was given orally.	The	public	l	.
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examination was duly conducted, and in the course of it, further

information was obtained. A s a result of that and of a search

which was done on 29 August 1985 the solicitors for the trustee

were told to institute proceedings to apply to recover both

properties mentioned above, that is the Moorooka property and the

Greenbank property. Although there is no direct evidence on the subject, I think I should infer that insofar as the application

related to the Greenbank property, it was also covered	by	the
indemnity.

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4.

According to a bill of costs which 1 s in evidence, on 6

September 1985 a letter before action was sent to Mr. Webb, but

there is no copy of such letter. On 11 September 1985 the

solicitors delivered a brief to counsel to settle the necessary

documents for application to this Court in relation to both properties, and the papers, duly settled, were returned the next day. On 17 September 1985, the solicitors wrote to Mr. Webb a (or

another) letter of demand threatening to file the papers in Court

if he did not agree immediately to give up hls Interest in the

properties. On 19 September 1985 two things happened, namely the applicatlon was filed in this Court, and solicitors for Mr. Webb

wrote to say that he would hand the properties over If the trustee

paid the costs of the transfers. That was ultimately agreed to,	a	r ./
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deed of settlement being executed on 21 October 1985, but in the

meantime Australian Guarantee Corporation Limlted had come to know

of the bankruptcy and lodged a proof of debt, on 9 October 1985.

The amount recovered from the Webb properties was

$47,876.85 but the trustee says that only about $35,000 is

available for distribution after payment of costs and outlays.

The Mercantile Credits Limited debt 1 s said to be $31,013.12, plus

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costs and interest, and the Australian Guarantee Corporation	i
Limited has proved for $83,443.53.

The proofs do not seem to have been admitted and I

assume this may be because of some question about interest

charges; I note that the Australian Guarantee Corporation Limited

debt is said to be the amount	d e as at 9 October 1985, well after
the date of bankruptcy.

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The reason Australian Guarantee Corporation Limited did t

not come to know of the bankruptcy until rather late was two-fold. I

Firstly, they did not see the advertisement of the bankruptcy or	E:
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that relating to the publlc examination; secondly, the bankrupt
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was unco-operative and did not tell the trustee of the existence

of the debt in question. By way of explanation of the former

circumstance, I was told that the company does not have any system

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of checking in the relevant publications to see if guarantors,

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such as the bankrupt was, are listed there. It appears to me,

however, that the fallure of Australian Guarantee Corporation

Limited to ascertain the fact of the bankruptcy should be regarded

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as virtually neutral and ought not to tell much against that	:.
company.

Counsel for Australian Guarantee Corporation Limited

argued that property had not been recovered under an indemnity for

costs of litigatlon. Firstly, he sald, most of the money was

spent in the Investigative process, and secondly, although

litigation was commenced, it should not be found that the recovery

of the property resulted therefrom.

The expression "recovered under an indemnity for costs

of liclgation" is a little lliptical. It seems to mean

"recsvered by reason of steps taken under an indemnity for costs

of. litigation"; an indemnity cannot itself directly bring about

recovery. Counsel argued that there is no intention in the

section to give a creditor an advantage by reason of having given

an indemnity for the costs of any investigation with a view to

possible litigation and referred to in Re Shadler (1905) 5

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I	S.R.N.S.W. 33.	In that case, Walker J. held that s.77 of the
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N.S.W. Bankruptcy Act 1899 applied in a winding up under the

Companies Act but that, giving that section (which was similar in

terms so far as relevant to s.109(10)) a strict interpretation,

the costs of inquiry into whether or not litigation should be

instituted were not covered by the section. It follows from

Shadler's case that here, if there had been an indemnity only for

the costs of investigation, the section would not have applied;

but the indemnity in the end covered both investigation and

litigation, as It did not in Shadler's case.

The question whether the property was recovered "under"

the indemnity is one of some difficulty. Glving the provision the

construction mentioned in the preceding paragraph, however, I find

that the property was so recovered. It seems a reasonable

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inference that it was the threat of Immediate litrgation which

induced Mr. Webb to offer to transfer the properties, and that

threat was made in the course of the solicltors pursuing thelr

retainer covered by the indemnity for the costs of litigation. In

my view, that indemnity covered the preliminary steps such as

preparing the Court papers and writing a letter of demand. I -

It is true that, had it not been for the investigative

work which was done, and in particular the public examination, it

seems unlikely that the trustee would have been able to ascertain

the facts; had he not known the relevants facts, then the

instructions to sue would never have been given. But I do not

think that the fact there was also an indemnity in respect of the

costs of the investigative work should be held to deprive the

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indemnifying creditor of whatever benefit would otherwise	flow
from the indemnity for the costs of litigation.

Counsel for Australian Guarantee Corporation Limited

also pointed out that in no reported case does the provision

seemed to have been applied at such an early stage; here the

proceedings do not even appear to have been served at the time Mr. !

Webb agreed to transfer the propertles. But the provision does

not say "recovered by means of litigation" and I am satisfied, as

I have said, that the present facts are caught by the provision.

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Apart from the costs already expended, I am told a sum

in the region of	$6,000 may	have to come out of the fund to meet	I.
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the parties' costs of the present application, assumlnq all costs	!.'
come out of the fund. As set out below, the costs of Australian

Guarantee Corporation Llmlted will not wholly come from the fund.

On the basis that there is a net amount of about $30,000 to be

distributed, and taklng into account the relative size of the two

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debts and the rlsk run,	I have come to	the conclusion that	l
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Mercantile Credlts Limited should receive, in the first place,

half the net amount recovered, and that the other half should	be	'-
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distributed pro rata.	< .
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There is a complication as to costs in that, in my view,

Australian Guarantee Corporation Limited should have its costs out

of the fund, but limited to one day's hearing in view of the

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inadequacy of its initial notice of intention to oppose. I shall

invite counsel to address me generally as to costs.

certify that this and the 7 preceding

pages are a true copy of the reasons for

judgment hcreln of His Honour

Mr. Justice Pincus

7 Sdy 1983

D & d

Counsel for the Applicant: Mr. A.J.H. Morris

Solicitors for the Applicant:	Cooper Grace and Ward
Counsel for the Respondents:	Mr. K.N. EIilson
Solicitors for the Respondents:	Henderson Trout
Date of Hearing:	7 July 1987